Elinoil Hellenic Petroleum's (ATH:ELIN) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Elinoil Hellenic Petroleum (ATH:ELIN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Elinoil Hellenic Petroleum is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.084 = €7.0m ÷ (€182m - €99m) (Based on the trailing twelve months to December 2020).

So, Elinoil Hellenic Petroleum has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Oil and Gas industry average of 5.8%.

Check out our latest analysis for Elinoil Hellenic Petroleum

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Elinoil Hellenic Petroleum's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Elinoil Hellenic Petroleum, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Elinoil Hellenic Petroleum's current liabilities are still rather high at 55% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, we're somewhat concerned by Elinoil Hellenic Petroleum's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 129% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing Elinoil Hellenic Petroleum we've found 4 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

While Elinoil Hellenic Petroleum isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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